Energy, Housing Costs Taking Toll on O.C. Outlook

Energy woes and higher housing and labor costs are eroding optimism among business leaders in Orange County, prompting a growing number of executives to consider moving all or part of their operations elsewhere, according to a survey released Tuesday.

Almost 25% of the executives polled said they plan to relocate some or all of their operations over the next five years, the highest percentage since 1998, the UC Irvine survey found.

In a further sign of pessimism, about one in every five executives expects to downsize in the next five years, the highest level since 1996.

While most executives still expect an improved financial performance by their companies this year, the “rampant optimism” that local business leaders displayed a year ago has diminished, said Dennis Aigner, a UC Irvine professor of management and economics and director of the university’s annual executive survey.

The survey, which involved telephone interviews with 300 executives in January and February, provides new evidence that while Orange County has so far dodged the brunt of the national economic slowdown, its impact is seeping into the area.

In separate interviews, executives say local firms are growing increasingly cautious.

While developers are still launching housing projects, the ventures are smaller in scope, for example. Some businesses also report dwindling backlogs of customer orders, while others note that some customers are canceling orders at the last minute.

“The real growth is not here in California anymore,” said James Majewski, president of Stratacom, an Irvine company that sells printed business products. “I’m sorry, but it’s out of the area.”

Seizing on the growing discontent, out-of-state recruiters are trying to coax local firms to relocate. The survey shows that 44% of the manufacturers--the segment hardest hit by power disruptions and surging energy bills--received such inquiries.

Indeed, local manufacturing executives seemed to have the most pessimistic outlook. One-third said they are considering moving at least part of their operations outside the area within the next five years. And 29% said they expect to trim operations during that period.

“We see more [manufacturing] firms than we have in a long time saying they downsized their operations last year and are planning to do so in the next five years as well,” Aigner said.

But the growing concerns extend beyond manufacturing, the survey found. Overall, the county’s allure as a place to do business has slipped to its lowest level in five years.

Some of the business barriers are long-standing--high housing prices and labor costs, for example. But this was the first year that executives were asked about energy issues, and they rated power costs as the second-biggest concern, after housing.

“The biggest problem is the uncertainty,” Stratacom’s Majewski said. “I just get a real feeling dealing with other companies that they’re waiting for the next shoe to drop.”

Still, many local companies remain upbeat about their businesses. Almost 80% of the executives said their businesses are likely to boost operations in the county over the next five years--adding workers and/or equipment or expanding plants--only slightly less than last year.

Because of the general nature of the questions, some executives said they intend to both expand and downsize their operations in coming years, according to Aigner.

Orange County companies historically have been optimistic about expanding, even when worried about the impact of the county’s bankruptcy in 1994 or fallout from Asia’s economic woes in 1997. Over the past 14 years, the number of companies that said they expected to expand has never dipped below 60%.

The survey found that more than 60% of the businesses were better off financially last year, but that was down from 70% in 1999. And the firms expecting improved results this year slipped to 65% from a buoyant 80% last year.

Volatile Stock Market Adding to Concerns

A variety of factors, such as the energy crisis, the volatile stock market and a broad contraction in the high-tech industry, is contributing to growing economic concerns. In addition, retailers have had trouble gaining momentum after a disappointing holiday season.

Dependent on a thriving retail climate, Plasticolor Molded Products expects sales to drop about 7% this year. Meanwhile, the Fullerton company’s electricity and natural-gas costs have at least tripled, said Gordon Bagne, chief executive of the auto accessories manufacturer.

“It’s just eroding our profits,” he said. “It’s hard to pass on any spike in our costs” for fear of losing a major customer. To defray costs, Plasticolor will rely more on cheaper imports, he said.

Kimco Staffing Services Inc. isn’t as busy as it was a year ago. The Irvine company, which has 30 branches statewide, expects revenue to drop about 10% this year, President Kim Megonigal said. Staffing companies tend to feel a downturn before other businesses, and Kimco noticed a slowdown about 10 months ago.

“We get calls requesting fewer people, or our customers are actually letting people go,” he said.

Clients of PacifiQ Systems in Newport Beach have become more cautious, said Denise Moon, co-chief executive of the software marketing company.

“We’ve had projects ready to sign on the dotted line,” she said. “When it went back to the board for final signature, they decided to scrap it.”

She blames the stock market volatility, in part, for making people skittish.

So does Don Crevier, owner of Crevier BMW. The Santa Ana company’s first-quarter sales were slightly ahead of last year’s, he said, but the car dealer’s backlog of orders has shrunk by 25% over the last four months.

Generally, Crevier is optimistic about the future and is, in fact, trying to secure land to build a bigger service center. But he is worried that energy costs will eat into profits.

Rising energy costs have also become a problem for Aluminum Precision Products, which has four manufacturing plants in the county. The Santa Ana company’s natural-gas bill is eight times higher than it was a year ago, and unexpected blackouts have damaged machines and ruined parts, President Philip S. Keeler said.

“They don’t give you a minute’s notice,” he complained about the power company. “It’s ‘click,’ the lights go out.” It took the company two days to repair one machine, costing about $6,000 in sales, he said.

Keeler said he’d like to move, but it would be too costly to relocate a company with such heavy equipment.

“We’re stuck here forever,” he said.